Academic journal article Journal of Accountancy

Taxing Employer Securities

Academic journal article Journal of Accountancy

Taxing Employer Securities

Article excerpt

The Taxpayer Relief Act of 1997 created two different tax rates for all long-term capital gains: a 20% rate for assets held for more than 18 months and a 28% rate for assets held for more than 12, but not more than 18 months. However, the 1997 act did not specify which rate would apply to "net unrealized appreciation." This no longer is a mystery. According to IRS Notice 98-24 (1998-17 IRB), net unrealized appreciation will be taxed at the lowest capital gain rate of 20%.

A net unrealized appreciation occurs when a qualified retirement plan invests in employer securities that increase in value after they are purchased by a trust. According to IRC section 402(e)(4)(B), if the employer securities are distributed as part of a lump-sum distribution, the taxable amount does not include the net unrealized appreciation. However, the net realized appreciation is taxed as a long-term capital gain when the securities are sold. …

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